Special Relationships and Tax Lures

By

Patience Wheatcroft

Updated Feb. 23, 2010 12:01 a.m. ET

A special relationship that has nothing to do with the U.S. was much in evidence Friday.

Spanish Prime Minister José Luis Zapatero had flown to London for what was little short of a love-in with U.K. Prime Minister Gordon Brown. "The British and Spanish governments are having the best relationship we have ever had in our history," Mr. Zapatero declared.

Since Spain is currently classified as one of the PIIGS—the group of most overstretched European economies that, were it not for the sake of a good acronym, might also include the U.K.—and since Mr. Brown has plenty of problems of his own, the pair might be grateful for any friends they can find.

On Friday, they were stressing the two countries' economic inter-dependence, with Mr. Zapatero— "mi amigo," as Mr. Brown called him—citing the millions of British holiday makers who head to Spain every summer and Mr. Brown pointing out that U.K. exports to Spain are double those to China.

Given the very special nature of this relationship, the two prime ministers announced they were launching a four-point plan to drive job opportunities for young people. Such opportunities are desperately needed in both countries but particularly in Spain where, among under 24 year olds, the unemployment rate is now close to 40%. Whether this initiative will have much impact on that problem is debatable. A competition for young entrepreneurs to "promote creative thinking in the low-carbon, high-technology new industries of the future" sounds more like something designed to produce photo opportunities than cut the dole queues.

Yet what really seemed odd was that the display of this "special relationship" came just a couple of days before Mr. Brown staged his Global Investment Conference, an attempt to encourage companies from all round the world to invest in the U.K. and help rebuild its badly dented economy.

While Mr. Brown had been lauding the scale of his country's exports to Spain, the U.S. followed by Germany are the U.K.'s biggest export markets. And though some Spanish firms have established a major presence—with Santander employing about 26,000 and Ferrovial sustaining heavy losses running airports in Britain— companies from 53 countries are established in the U.K.

Why commit to a special degree of cooperation with one country just before trying to woo the rest of the world?

But wooing was what the prime minister was intent on doing as he addressed the representatives of 250 companies at yesterday's conference. He announced "an investors charter" that promised a commitment to providing a skilled work force on tap, no mean feat considering the current skills shortage.

Another of the enticements he proffered related to that tricky area of tax.

In a global market, a degree of tax arbitrage is inevitable. Companies have been leaving, or threatening to leave, the U.K. because of what is perceived as an increasingly inhospitable tax regime. So Mr. Brown announced that his chancellor was issuing the first ever "tax framework for business."

It would, however, be a foolhardy finance director who took much comfort from this document, which, said the prime minister, would guide future tax policy. Consisting of just four pages, the front bearing only its title and the back its copyright details, this amounts to nothing more than a statement to try to be reasonable when it isn't difficult to be so.

Even the promise to consult ahead of proposed tax changes is prefaced with the telling phrase "where possible."

This skeletal document does acknowledge that business values stability and certainty and competitiveness when it comes to tax. Failure to deliver on these has persuaded companies to quit the country. One particular issue has been the taxation of overseas profits, where planned changes are causing a degree of unrest.

Aware of anxieties, it seems that HMRC, the U.K. government's tax collectors, may have been more emollient than usual in recent conversations with larger businesses, persuading them that their bills against overseas profits may not be as onerous as they feared.

It would be invidious for different levels of taxation to be agreed with different companies but, as tax lawyers know only too well, no matter what pledges the document makes on "simplicity," U.K. tax is anything but that. So it may be that fruitful negotiations are possible if the result is that the business remains head- quartered in the U.K. rather than carrying out a threat to leave.

Europe fails to take off

Lufthansa pilots have postponed their strike action, but British Airways staff have voted again in favor of industrial action. Staff in both airlines seem reluctant to recognize the new realities of airline economics.

Last year, according to the International Air Transport Organization, saw the worst decline in passenger traffic in the postwar era.

In an environment in which recession-scarred companies are cutting back their travel budgets, airlines have no option but to curb their costs. Yet Lufthansa's pilots are demanding a 6.4% pay rise and at BA, unions are resistant to the company's proposed pay freeze.

For Willie Walsh, the BA chief executive, a full-scale battle with the unions has long had a feeling of inevitability about it. Too many outdated practices remained entrenched.

The unions need to realize that, increasingly, business customers can cut back the amount of time they spend flying. Vast improvements in video conferencing now make virtual meetings perfectly workable.

If canceled flights cause major disruption to travelers, the strikers will be driving those executives to look at just how they might avoid such inconvenience in the future.

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